Speeding the Winds of Change in Cuba-US Economic Relations

President Obama yesterday ended an embargo policy that had neither dislodged the Castro regime nor brought democracy to Cuba. Instead, over five decades, the US policy of isolating Cuba economically entrenched Cuban determination to continue its hostile relationship with Washington. There is no guarantee that President Obama's historic initiative will foster prosperity, human rights, and political freedom, but it can hardly do worse than the prior policy.

Obama's measures include diplomatic, political, and economic steps that will set the stage for more open trade and investment relations. In an important first step, the two countries will reopen embassies that were closed in January 1961. Secretary of State John Kerry will review Cuba's designation as a State Sponsor of Terrorism.

The administration was responding in part to changes under way in Cuba in recent years under President Raul Castro, who has introduced such economic reform measures as allowing Cubans to buy and sell property, lifting restrictions on small-scale private economic activity, thereby promoting a class of microentrepreneurs and permitting more freedom of movement of Cubans within and outside the country.

Obama's initiative also enables more American citizens to travel to Cuba for family, informational, and humanitarian reasons. It raises the level of remittances from $500 to $2,000 per quarter both for familial support and the development of private businesses in Cuba. President Obama also relaxed controls on sales to private Cubans of goods such as building materials—desperately needed in beautiful but crumbling cities—agricultural equipment—to bolster Cuba's declining agricultural sector—and telecom gear such as iPhones—to bring Cuba into the information age.

Other measures loosen the cash-in-advance requirement for US sales and allow American citizens to bring small quantities of Cuban rum and cigars back home and to pay with their debit cards.

Updating the global application of US sanctions against Cuba will avert embarrassments such as preventing the World Health Organization from paying per diem allowances to Cuban doctors working in Ebola wards and blocking World Bank and International Monetary Fund programs in Cuba.

Obama's initiatives leave the relationship a long way from economic normalization, however. In our book Economic Normalization with Cuba: A Roadmap for US Policymakers, we argue the importance of full economic engagement. According to our estimates, US merchandise exports of goods and services to Cuba could reach $5.9 billion annually, while Cuban exports to the United States could reach $6.7 billion annually. The stock of direct investment from all foreign countries in Cuba might reach $17 billion, up from less than $1 billion today.

But sequencing is important. Simply lifting the embargo in one grand gesture would not help Cuba ensure an economic and political environment conducive to free markets and human rights.

Instead, a careful and reciprocal approach is called for, one that encourages Cuba to build solid economic and political institutions and does not simply transition from communist dictatorship to oligarchic autocracy. Further US relaxation of economic restrictions should not be carried out in a way that would squander a golden moment for ensuring meaningful changes in Cuban economic and political structures.

Because Cuba has no border barriers to US trade and investment, some analysts claim that the embargo—or bloqueo, as it is called in Cuba—is the sole reason why there have been no economic relations with the United States. This assertion is formally true—but powerful state-owned industries will have a vested interest in demanding disguised protection from outside competition. Such a move by these interests would hurt not only US businesses but Cuban consumers, who would pay higher prices for goods and services, and new Cuban entrepreneurs, who would be frozen out. Entrenched interests from other countries, who now enjoy a privileged position, protected from US competition, may also lobby for special treatment.

Future give-and-take negotiations should ensure that US firms and workers get a fair shake in the new Cuban economy, and, importantly, that Cuban workers and consumers benefit from the new order. Our study lays out prescriptions to prevent the emergence of powerful oligarchies, as happened in Russia, that skim off benefits from a market economy and bar foreign competition.

In the right framework, the United States can offer a wide range of goods and services, including full liberalization of tourism, along with technical and financial assistance. In return, Cuba can ensure national treatment for US goods, services and investment, and accord US firms the same treatment already offered to European, Canadian, and Chinese firms.

If President Obama and his successors deliver a full portfolio of US economic concessions without seeking any liberalization in return, Cuba's economic transition may proceed slowly, allowing corruption and favoritism to flourish. US firms and citizens, and new Cuban entrepreneurs, may be pushed to the back of the line for commercial opportunities. To avert these bad results, the time is ripe for Congress and the White House to cooperate with the administration as it engages Cuba and debate the sequencing of US economic policies to ensure good outcomes for both countries.